The politics of debt – why overcoming structural deficits might be both easier and more difficult than generally assumed

debt word collageOver the past few years, it seems that politicians have suffered an important loss of independence. Instead of displaying leadership and shaping economic policy, they are being chased by “the markets”. Central banks around the world have heeded politicians’ calls for help and reduced interest rates to historic lows. Nevertheless, growth remains slow, unemployment high, and investors nervous.

Not least in Europe, governments and the European Central Bank (ECB) outbid each other in their efforts to contain market fears and return the common currency to stability. It took no less than Mario Draghi’s announcement of the ECB’s “Outright Monetary Transactions Program”—the ECB’s commitment to buy unlimited government bonds on the secondary market—to break the vicious circle of spiraling government debt and bank rescues. Investor fears remain, however: Cyprus’ bailout in March this year warrants further caution on this front and when the Federal Reserve recently hinted at a possible end of Quantitative Easing next year, stock markets fell.

The reasoning underlying loose monetary policy in the current crisis is based on solid economic theory and most economists agree—at least in principle—that this approach is right. Similarly, all rescue measures following the initial Greek bailout certainly prevented a dangerous domino-effect. However, government bail-out packages in the Euro area, central bank bond-buying programs, and low interest rates share a common feature: they merely deal with problems in the short-term.

At first, this does not seem like a revolutionary statement—most economists will reply that monetary policy obviously only affects the short run and politicians will maintain that they are well aware of the need for structural reform. After all, long-term reforms require time to take effect; loose monetary policy, bailout and bond-buying programs are therefore dictated by current circumstances without leaving much room for alternatives. To a certain extent, this is true and in this sense, politicians and central bankers are merely reacting to the crisis. However, this story suffers from two oversimplifications.

First, it neglects the effect of short-term relief on politicians’ incentives to tackle long-term problems. Decision-makers have to strike a balance between the costs of reform and the costs of inactivity. On the one hand, implementing painful budget cuts and structural reforms that lower real wages and pension benefits creates discontent and therefore cost governments their popularity and votes. On the other hand, the immediate crisis results in political pressure that requires a reaction and the provision of solutions by politicians. By nudging central banks to loosen monetary policy and providing short-term relief in the form of rescue-packages, governments can avoid costly structural reforms while displaying activity and reducing popular pressure. The result is that—although economically sound—short-term relief might actually harm the process of necessary long-term structural reforms by reducing politicians’ incentives to implement it.

Second, the story ignores the immediate positive effects that the adoption of long-term reform measures can have. The reason why the Eurozone had to adopt several subsequent ultima ratio rescue packages is that the governments never provided a credible roadmap for sustainable reform of their public finances. Similarly, postponing decisions about the public pension reforms and other demographic challenges creates uncertainty in the business environment which severely reduces private investment.

The point here is that the way out of the current economic crisis lies in the adoption of both short-term and long-term measures. The rationale should be that a real solution is the adoption of structural reforms and the reduction of structural budget deficits. A simultaneous loosening of monetary policy together with emergency provisions for the stabilization of the financial sector are equally important, but they merely buy time for the former to take effect. While a tendency to myopic economic policy represents a systemic difficulty of any democratic system, more weight should therefore be placed on the benefits of reducing political window-dressing and increasing transparency and accountability in economic policy-making. If politicians stop blaming the markets for being suspicious of their policies, they can co-opt them and thereby regain control of the situation.

 

By: Marvin Gouraud

Sources: European Central Bank, Journal of Economic Policy Reform, The Economic Journal, Critical Review, The Wall Street Journal, Journal of Public Policy, Capital Markets Law Journal, Business Week, Council of the European Union, The International Spectator

Bitcoin and the Challenges of Virtual Currency

bitcoinAlthough Bitcoin, the “world’s first decentralized digital currency”, was launched in 2009, it has only recently gained popularity as a currency. Unlike other existing currencies, Bitcoin lacks a central monetary authority, which creates problems for financial regulators. In place of a traditional central monetary authority, a computer network composed of Bitcoin users self-regulates the currency. Members of this Bitcoin network “monitor and verify” the creation of new Bitcoins and also regulate transactions between users.

Bitcoins are generated through a virtual process known as “mining.” A unique serial number is allocated to each Bitcoin after it is created. However, the total number of Bitcoins that can be produced is limited to 21 million. There are currently about 11 million Bitcoins in circulation, equivalent to approximately $1.2 billion. Popularity of the Bitcoin currency has recently surged, as Bitcoins have recently become available to “ordinary customers and businesses.” Many small businesses are therefore beginning to accept Bitcoin as a viable form of payment. Small businesses in particular benefit from Bitcoin’s swipe fees, which are on average about 2% lower than those of credit cards. Owners of small businesses also favor the simplicity of using a virtual currency as opposed to cash or other forms of payment.

Various complications have emerged as authorities attempt to regulate Bitcoin’s use as a currency. Because Bitcoin users can maintain anonymity in transactions, Bitcoins are likely to be used for illicit purchases or transactions. As a result, federal and state regulators “are taking steps to prevent people and companies from using them for illegal activities.” In a recent interview, Benjamin Lawsky, superintendent of New York’s Department of Financial Services, stated, “Virtual currency firms inhabit an evolving and sometimes murky corner of the financial world.” However, authorities must gain a deeper understanding of Bitcoin’s mechanics before instituting effective regulatory measures. As Tony Gallippi, CEO of Bitcoin-handling company BitPay, explained, “You can’t apply the rules for the horse and buggy to an automobile.”

Bitcoin has recently faced a stream of legal difficulties. Last week, two prominent officials of the Bitcoin Foundation travelled to Washington to meet with federal officials, attempting to prove their willingness work within federal laws. General council of Bitcoin, Patrick Murck, told officials, “There’s a myth about Bitcoin that it is an anonymous payment network. That is not true. [Bitcoin has] an open public ledger that shows every transaction.” Although Bitcoin’s ledger is public, there is no formal mechanism to tie Bitcoin addresses to the identities of their owners. It is also unlikely that Bitcoin will mandate user identification in the future, as this would alter the configuration that made it successful in the first place.

So far, Bitcoin has lacked stability as a currency and many argue that Bitcoin is losing steam. In January 2013, Bitcoins were worth $13, rising to $266 by April, and falling to about $100 today. Due to the general novelty of online currency, Bitcoin’s future remains uncertain. Perhaps with tighter regulations and less volatility, Bitcoin and other virtual currencies will gain prominence in the global market.

By: Marjorie Baker

Sources: Wall Street Journal, Economist, Economic Times, NBC News, Washington Post

Photo Credit: Bitcoin courtesy of flickr user Electric-Eye

MOOCs: Classrooms of the Future

MOOCsMassive Open Online Courses (MOOCs), a form of online education, have emerged as an innovative method of teaching at an unprecedented pace. Founded in fall of 2011, Coursera, a leading MOOC, has reached enrollment of 3.1 million students worldwide as of April 2013. Coursera recently divulged plans to continue its rapid growth by partnering with 10 public universities and university flagships in the United States. Other online education companies have also been expanding. For example, in May, Georgia Tech announced its plans to partner with Udacity, another MOOC provider, to offer the first online master’s degree in computer science. Coursera’s cofounder, Andrew Ng explains that Coursera’s growth is part of a larger global movement towards online education. He recently stated, “Colleges are experimenting with different models state-by-state, but one thing is clear — the world is moving toward blended learning.” It is evident that online education is particularly beneficial to students in areas of the world who lack other education options, such as Eastern Europe, Africa, and the Middle East. Coursera has demonstrated a global strategic push by translating many of its courses into eight foreign languages, which will be available to students in September 2013.

However, despite their advantages, MOOCs as alternative forms of education have been subject to criticism. Opponents argue that the lecture format of teaching employed by MOOCs inhibits possibilities for one-on-one communication between instructors and students. Course enrollment sizes (up to 50,000 students can be enrolled in a single course simultaneously) also limit constructive interactions between students and their instructors, as well as among the students themselves. In addition, although online courses experience incredibly high enrollment rates, completion numbers pale in comparison. Only about 10% of students initially enrolled in MOOCs actually end up finishing them. As a result, MOOC providers continue to investigate ways in which these deficient rates can be remedied. Fortunately, online courses also provide novel opportunities to evaluate teaching methods. Ng states, “We see every mouse click and keystroke. We know if a user clicks one answer and then selects another, or fast-forwards through part of a video.”

Reform of the U.S. education system is both imperative and inevitable. Overdue student loans are at an all-time high and only about half of recent college graduates are working in jobs in which their degrees are necessary. As MOOCs become more widespread and continue to develop, perhaps online courses can contribute to resolving these issues.

Posted by: Marjorie Baker

Sources: Washington Post, Wall Street Journal, Venturebeat, New York Times, MIT Technology Review, Huffington Post, Forbes, Brookings

Photo credit: Library2010_028 courtesy of flickr user UTC Library

You are invited: The Trans-Pacific Partnership: New Rules for a New Era

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The Program on America and the Global Economy, the Asia Program, the Canada Institute, the Kissinger Institute, the Latin American Program and the Mexico Institute with the support of Wilson Center Senior Scholar William Krist Present:

The Trans-Pacific Partnership: New Rules for a New Era 

Wednesday, June 19, 2013

2:00 – 5:00 pm

Flom Auditorium, Woodrow Wilson Center


WELCOME and KEYNOTE:

2:00 pm – 2:40 pm

Robert Zoellick, Harvard Belfer Center and  Peterson Institute for International Economics; former president of the World Bank, former United States Deputy Secretary of State and former U.S. Trade Representative

PANEL 1: How the TPP fits into other regional trade agreements.

2:50 pm – 3:50 pm

NAFTA, FTA between Canada and the EU:

  Ari Van Assche, Professor, International Business, HEC Montreal

TTIP:            Michael Geary, Fellow, Wilson Center and Assistant Professor, Maastricht University, The Netherlands

ASEAN:        Roberto Herrera-Lim, Director, Eurasia Group

PANEL 2: Current countries involved in the TPP and what it will take for a successful negotiation.

4:00 pm – 5:00 pm

Australia: Joshua Meltzer, Fellow, Global Economy and Development, Brookings Institution

Vietnam:  Ambassador Nguyen Quoc Cuong, Ambassador of Vietnam to the United States

Chile:       Marcos Robledo, Professor of International Relations and Foreign Policy, Universidad Diego Portales

Moderator:  Kent Hughes, Director, Program on America and the Global Economy, Wilson Center


 

Please RSVP (acceptances only) to page@wilsoncenter.org

The Wilson Center is located in the Ronald Reagan Building at 1300 Pennsylvania Ave., NW. (Federal Triangle Metro stop on the Blue/ Orange Line) For a map and directions see: http://www.wilsoncenter.org/directions.  Please bring a photo ID and arrive 15 minutes ahead to allow time for the security checkpoint. 

Media guests, including TV crews, are welcome and should RSVP directly to elizabeth.white@wilsoncenter.org

A Manufacturing Renaissance?

manufacturing2On May 29th, 2013, Motorola announced the opening of a manufacturing plant in Fort Worth, Texas to produce its new product, the Moto X. Motorola estimates that the plant will generate roughly 2,000 American jobs. Texas Governor Rick Perry supports Motorola’s initiative, stating, “Motorola Mobility’s decision to manufacture its new smartphone and create thousands of new jobs in Texas is great news for our growing state.”

Motorola’s decision is especially significant in the modern age of dominant overseas outsourcing. Moto X will be the first smartphone manufactured entirely in the United States. Will Moss, a spokesman for Motorola Mobility, explains that producing the Moto X in the United States will engender “much leaner, more efficient operations” by moving Motorola’s manufacturing operations “much closer to our key customers and partners as well as our end users.” Other technology firms have been following this same trend. For example, in December, Apple CEO Tim Cook announced plans to move the manufacturing of an existing line of Mac computers to the United States within the coming year.

Although some experts believe that these companies’ efforts are primarily politically motivated, other reasoning may exist to explain recent attempts to bring manufacturing opportunities back to the United States. A recent Gallup poll determined that 64% of Americans are willing to pay more for a product produced in the U.S. as opposed to overseas. Additionally, wage increases have led to rising production costs for companies located in East Asia. Economist Dan North predicts that the difference in labor costs between China and the United States could decrease to only $7 per hour by 2015 (as opposed to the $17 difference reported in 2006), as the Chinese economy strengthens and Chinese workers push for higher salaries.

It is still unclear if the “Manufacturing Renaissance” will generate enduring consequences for the U.S. economy—an increase in U.S. industrial production has yet to occur. According to the Federal Reserve, industrial production fell by 0.5 percent in April. Furthermore, although the total number of manufacturing jobs in the United States has increased by 520,000 since January 2010, only 50,000 of those jobs are due to re-shoring. It is therefore disputable as to whether efforts to bring manufacturing back to the U.S. will contribute to profound and lasting benefits for the U.S. economy, or if companies’ current efforts in this capacity will merely amount to a short-lived phase.

Posted by: Marjorie Baker

Sources: The Washington Post, CBS News, Businessweek, the Federal Reserve, Gallup, Huffington Post

Photo Credit: Big Industry of America courtesy of flickr user Canon in 2D

Event Summary: The Next Generation of Earth System Education

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On Earth Day 2013, Monday, April 22nd, a panel of Geo-science, technology, engineering and mathematics Master Teachers convened at the Wilson Center to discuss several innovative endeavors to engage teachers and students in Earth science studies using state-of-the art technologies and education resources.  The event was co-hosted by the Program on America and the Global Economy (PAGE) and the Global Sustainability and Resilience Program.  The event was moderated by Kent Hughes, Director of PAGE.

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John Moore, Director of Geo-science STEM Education at Palmyra Cove Nature Park and Environmental Discovery Center in New Jersey, former Albert Einstein Distinguished Education Fellow, and Executive Director for the American Council of STEM Teachers opened the panel discussion by pointing out two very important and influential opportunities for reform in STEM education: the PCAST Report to the President on plans for improvements in K-12 STEM education released on September 15, 2010 and the recently released Next Generation Science Standards (NGSS) report which outlines the new voluntary, rigorous, and internationally benchmarked standards for K-12 science education.  Moore emphasized the importance of, “developing the teachers’ voice,” providing several examples of projects for leadership and professional development of teachers such as the DataStreme Project, a distance learning course designed by the American Meteorological Society,  and Global Learning and Observation to Benefit the Environment (GLOBE), a worldwide network for sharing resources for primary and secondary earth science education.

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Marcia Barton spoke next about the opportunities and challenges for STEM educators.  She agreed that the NGSS report provided an opportunity to transform science in the United States by integrating the sciences instead of using current standards of teaching the sciences separately.  The NGSS report also elevated earth and space science, including them more in the proposed curriculum.  The challenges for geo-science, according to Barton, were taking advantage of this increased focus and engaging the students in this material, and training the next generation of teachers.  She proposed starting an academy for innovation and sustainability to engage students in geo-science and engineering, especially with the increase in job opportunities for geoscientists.  Based on President Obama’s initiative to prepare 100,000 new STEM teachers in the next decade, Barton suggested making 30,000 of those earth and space system science teachers.

Vicky_Gorman

Vicky Gorman discussed efforts to promote geo-science education in her community with the Citizen Science Education Program (CSEP).  CSEP was designed by middle school students and tailored for their own community.  The program seeks to increase scientific literacy within the community and is part of the Weather Ready Nation network, a NOAA initiative.  Gorman stressed the importance of communication and leadership skills within students to prepare them for the workforce, with development of those skills starting in middle school.  She stated, “Unless students are marketable, all their education goes to waste.”  Gorman emphasized the importance of geo-science education as it encompasses chemistry, physics, and biology and applies to real-life situations and the global economy and where our workforce needs to be.

Peter Dorofy commented on the technology challenges of teaching earth science.  Traditionally, earth science is a non-lab course but with increasing technological advances such as GPS, GIS, remote sensing, and real-time data, that is changing.  He spoke of the challenges at his technical college in New Jersey, such as budget cuts and shifting programs, and how to make earth science relevant to students who have already chosen a career.  Dorofy stated it was key to identify real-life situations in which earth science can be applied and to take advantage of all the technology in the field to excite students.

John Moore recapped the first part of the panel and reiterated that teachers have a unique opportunity to push earth science.   The problem is in implementation.  Moore stated that in many schools the 1996 NGS Standards are barely implemented today, therefore, the responsibility will lie with the next generation of teachers to ensure that these new standards are realized.

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Kevin Simmons and Jin Kang explained new technology in the geoSTEM field: cubesats, microsatellites, which are powerful, interactive tools that can be used by schools to provide data from space.  Cubesats introduce children to systems engineering and allow them to put the engineering method, which Simmons distinguished from the scientific method, into practice.  Kang emphasized the two essential factors of effective education: motivation and hands-on education which are key to encouraging creativity and innovation.

The panel responded to audience questions about the integrity of the geoSTEM programs, differences between the U.S. and Korean education systems, and the new common core standards and standardized testing.

Drafted by Elizabeth White

Click here to view the video recording of this event.

The Challenge of a Changing China

chinaLower than expected growth numbers from China on Monday have raised worries that China’s economy may be losing momentum.  Forecasted to have a growth rate around 8%, China’s actual growth came in at a lesser 7.7% for the January to March quarter, compared with 7.9% in the previous three months. This slower growth is in part due to lagging recoveries in the US and Europe causing China’s exports to decline. However, it is important to note that major, if understated, structural changes within China’s own economy have also contributed to these unexpectedly low growth numbers.

Rapidly rising wages have led to a systemic shift in the way China’s economy currently operates and have caused the country to move away from its traditional reliance on low cost manufacturing. China is looking towards a transition to a more sustainable economic growth model and these numbers might be indicative of the growing pains that China is currently facing. In fact, according to Ms Yao of Societe Generale,”Given Beijing’s goal of restructuring the economy, a relatively moderate economic growth is not a bad thing in the longer term.” While China will likely remain a manufacturing hub thanks to its relatively mature investment environment, superior infrastructure, and skilled workforce, it is the higher-knowledge industry sector and domestic consumption that will be the future drivers of Chinese growth.

Improving wages and job opportunities have created an optimistic and vibrant consumer class that has demanded both a higher standard of living and higher quality goods and services. Metaphorically speaking, Chinese citizens are emerging from the factories and entering the malls. Rather than being a mere base of production, China has become a prime market to sell into as consumption continues to increase. This massive and complex market holds huge commercial potential for those businesses that can successfully adapt and gain a foothold. Meanwhile, China itself can benefit greatly from increased foreign direct investment as its economy continues to mature.

Despite China’s economic dynamism, it is still a place that is plagued with many dilemmas that limit its potential. Some of the most infamous issues revolve around corruption, which is especially rampant at the local level leading to staggering pollution, serious quality control issues, and enormous levels of inequality. In addition, China’s educational system is stunted by its singular focus on testing and needs to be reworked to foster creativity and innovation, skills that are vital in an increasingly connected global marketplace. These concerns may limit China’s global economic potential, especially when major policy efforts are still needed to address these critical domestic problems.

Overall, China is still dealing with the disorder commonly found during major economic transition. Its switch from a primarily manufacturing economy to a consumer economy may take time as growth rates begin to rebalance. In fact, it is likely that  these declining numbers indicate not economic problems in China, but an economic changing-of-the-guard that will result in less dramatic, healthier, and more reliable economic growth.

Posted by: Matthew Goldberg

Sources: The Economist, BBC News, Bloomberg, CME Group

Photo Credit: China Pavilion courtesy of flickr user Wojtek Gurak